Supreme Court Hears Estate Planning Case

The Supreme Court recently issued a decision in a North Carolina case, which will likely have a limited but substantial impact on estate planning and tax-related issues. 


The case in issue concerned North Carolina’s taxation of Kimberley Rice Kaestner’s 1992 Family Trust for more than $1.3 million between the years of 2005 to 2008. The court later ruled that the state of North Carolina was not able to tax the trust because the only connection to the state that the beneficiaries lived there.


The Impact of the Supreme Court’s Decision


The Court’s decision placed a limitation on the state’s ability to tax  trusts. If a state’s only connection is a beneficiary’s residence and provided that the beneficiary does not have the right to demand income from the trust, a state will be prohibited from imposing tax payment on income that is generated by the trust. The opinion, however, does not have seem to have reached a greater decision concerning state taxes.


A Pending Case in Minnesota


Despite the limited nature of the Supreme Court’s ruling, it remains uncertain how the Supreme Court of the United States will treat a pending Minnesota case. 


The case of Bauerly v. Fielding concerns the state of Minnesota attempting to tax the income of multiple trusts created by the same grantor. 


Some of the elements that make this case different from the North Carolina one are: the grantor was a Minnesota resident, the trusts were created in Minnesota, and the trusts held stock in a Minnesota S corporation. 


The Minnesota Department of Revenue has requested that the United States Supreme Court overturn the Supreme Court’s decision that there were not enough connections between the trust income and the state to make the tax constitutional. The Supreme Court, however, has not yet determined if it will hear the case.


How Trusts are Taxed


Trusts can be an invaluable estate planning tool in controlling assets both during and after a person’s death. During the trust creator’s life, these trusts can be helpful in controlling assets if the creator become disabled or incapacitated. 


Following  the creator’s death, a trust can be used to protect assets as well. 

Income places in trusts is differently taxed in one of two ways. First, grantor trusts are taxed to the grantor, who will then be required to report the income of the trust on a Form 1040. 


Nongrantor trusts, however, are taxed as a separate entity. Trustees of these trusts must file a Form 1041, which will document all of a trust’s items and income. If a trust has income and no offsetting distribution deduction, the trust will be taxed on this income. When multiple states attempt to tax the trust, complex issues can quickly arise.


Speak with an Experienced Estate Planning Lawyer

The creation of a trust is particularly complex. If you need the assistance of an attorney to navigate these matters, you should not hesitate to contact Ettinger Estate Planning today to schedule a free initial case evaluation.

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